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Principal & Agent
Liability

Understand how principals and agents become liable for contracts and torts in agency relationships: the foundation of business law on the CPA REG exam.

CPA Regulation (REG)

What Is an Agency Relationship?

An agency relationship arises when one party (the principal) authorizes another party (the agent) to act on their behalf. The agent's actions can bind the principal to contracts and create liability for torts.

The Three Parties in Agency

Principal
The person who authorizes the agent to act. May be disclosed, partially disclosed, or undisclosed to third parties.
Agent
The person authorized to act on behalf of the principal. Owes fiduciary duties of loyalty, obedience, and care.
Third Party
The outside party who deals with the agent, often unaware of the principal's identity or existence.

Why Liability Rules Matter

When an agent enters a contract or causes harm, the critical question is: Who is liable? The answer depends on the type of authority the agent had and whether the principal's identity was known to the third party.

Principal Agent Third Party Authority Contracts / Torts Liability? Liability?

Types of Agent Authority

1
Express Actual Authority: Principal explicitly tells the agent what they can do, orally or in writing.
2
Implied Actual Authority: Authority reasonably inferred from the agent's position, customs, or prior dealings.
3
Apparent Authority: The principal's words or conduct lead a third party to reasonably believe the agent has authority.
4
Ratification: Principal approves an unauthorized act after the fact, retroactively creating authority.

Disclosed vs Undisclosed Principal

Disclosed
Third party knows both the principal exists and their identity. Principal is liable; agent generally is not.
Partially Disclosed
Third party knows a principal exists but not their identity. Both principal and agent may be liable.
Undisclosed
Third party has no idea a principal exists. Agent is liable. Principal may also be liable once discovered.

The Core Rule: Contract Liability

Agent Has Authority? Yes No Principal Disclosed? Yes Principal Liable Agent: Not Liable No Both May Be Liable Third party elects No Binding Contract Unless... Principal Ratifies Retroactive authority

The Core Rule: Tort Liability

A principal can be liable for an agent's torts (civil wrongs) under the doctrine of respondeat superior: "let the master answer."

1
Employee Status: The agent must be an employee, not an independent contractor. The principal controls the manner and means of work.
2
Scope of Employment: The tort must occur within the scope of employment: during work hours, at the workplace, and furthering the employer's business.
3
Agent Always Liable: The agent who actually committed the tort is always personally liable, regardless of the principal's status.

Employee vs Independent Contractor

Employee Independent Contractor
Control Principal controls how work is done Principal controls only the result
Tools / Equipment Provided by principal Provided by contractor
Tort Liability Principal IS liable (respondeat superior) Principal generally NOT liable
Contract Liability Same rules based on authority Same rules based on authority
Exceptions Frolic vs detour Inherently dangerous activities

How to Analyze Liability

1
Identify the claim type: Is it a contract claim or a tort claim? Different rules apply.
2
Determine authority (contracts): Did the agent have actual, apparent, or ratified authority?
3
Classify the principal (contracts): Disclosed, partially disclosed, or undisclosed?
4
Check employment status (torts): Is the agent an employee or independent contractor?
5
Check scope (torts): Was the agent acting within the scope of employment when the tort occurred?

Example 1: Disclosed Principal

Facts: Alex (principal) hires Beth (agent) to buy office supplies from Vendor Corp. Beth tells Vendor Corp she is buying on behalf of Alex. Beth signs the purchase order in Alex's name.

Example 2: Undisclosed Principal

Facts: Carlos (principal) instructs Dana (agent) to lease office space but tells her not to reveal that she is acting for anyone. Dana signs the lease in her own name. The landlord has no idea Carlos exists.

Example 3: Tort Liability

Facts: FastShip Inc. employs Eric as a delivery driver. While making a delivery during work hours, Eric negligently runs a red light and injures a pedestrian.

Example 4: Apparent Authority

Facts: Fiona (principal) fires her agent Greg but does not notify existing clients. Greg continues to place orders with Supplier Inc., who reasonably believes Greg still works for Fiona.

Common Mistakes

✕ Confusing Authority Sources
Apparent authority comes from the principal's actions, not the agent's self-proclaimed authority. An agent claiming powers they don't have does not bind the principal.
✕ Ignoring Principal Type
Whether a principal is disclosed, partially disclosed, or undisclosed changes who is liable. Always classify the principal before determining liability.
✕ Applying Respondeat Superior to ICs
Respondeat superior applies to employees only. A principal is generally not liable for an independent contractor's torts (except inherently dangerous activities).

Liability Summary Table

Contract Liability Tort Liability
Disclosed Principal Principal liable; agent not liable Respondeat superior if employee + scope
Partially Disclosed Both may be liable Same tort rules apply
Undisclosed Principal Agent liable; principal liable if discovered Same tort rules apply
Agent (always) Liable if undisclosed/partially disclosed P Always personally liable for own torts
Independent Contractor Authority rules still apply Principal generally not liable

Question 1 of 5

A principal hires an agent to negotiate a contract. The agent tells the third party the principal's name. The agent signs the contract within her authority. Who is liable on the contract?

Question 2 of 5

An agent enters a contract on behalf of an undisclosed principal. The third party later discovers the principal's identity. What is the third party's remedy?

Question 3 of 5

Under the doctrine of respondeat superior, which of the following conditions must be met for a principal to be vicariously liable for an agent's tort?

Question 4 of 5

Fiona fires her agent Greg but fails to notify existing clients. Greg then enters a contract with a client on Fiona's behalf. Is Fiona bound by the contract?

Question 5 of 5

A delivery driver (employee) causes an accident while making a personal detour to pick up lunch during work hours. Is the employer liable?